Most economic analysts had expected a decline of around 5% m/m. Nevertheless, January’s fall was modestly more than the 2.3% m/m decline in GDP seen in November during the previous lockdown and was the largest monthly fall in GDP since last April.

January’s contraction was primarily due to the services sector, where output fell 3.5% m/m with hospitality and leisure businesses and non-essential retailers closed. There was a 16.3% m/m decline in education services. However, there was large growth in health output.

Unlike November, manufacturing output declined in January (by 2.3% m/m) as activity was adversely affected by supply chain disruptions. However, construction output managed to keep growing, by 0.9% m/m.

On the expenditure side of the economy, it appears that consumers were markedly more cautious in January and that their spending contracted appreciably given that retail sales volumes fell 8.2% m/m while scope to spend on hospitality, leisure and consumer services was curtailed.

Positively, survey evidence (particularly PMI data) suggests that economic activity came off its January lows in February, despite the ongoing lockdown, as a continuing rapid roll out of the COVID-19 vaccines boosted consumer and business confidence. There are signs that consumers were more prepared to spend in February, although their ability to consume was still limited.

Economic forecaster EY ITEM Club had expected the economy to contract by 3-4% quarter-on-quarter (q/q) in Q1 2021, but the decline may now be no more than 2% q/q given the smaller-than-expected January decline.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “After this, the EY ITEM Club expects the economy to benefit progressively through 2021 as the roll-out of COVID-19 vaccines facilitates the easing of restrictions in line with the government’s road map and boosts consumer and business confidence. Most consumers look well-placed to play a key role in the recovery given the recent high savings ratios, although much will depend on how much unemployment ultimately rises.

“Given the resilience of the labour market so far and the extension of the furlough scheme to September, it now looks like the rise in unemployment will be far less than had been predicted. Indeed, the EY ITEM Club suspects that the peak in the unemployment rate will now be limited to 6.3%.

“After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy; this should be supported by the tax incentives to invest in the Budget. Meanwhile, improving global growth should be supportive to UK exports.”

Mr Archer added: “The EY ITEM Club currently forecasts GDP growth of 5.0% in 2021 followed by expansion of 6.5% in 2022. This means the economy regains its peak level of Q4 2019 around mid-2022.

“However, it is very possible that the EY ITEM Club will revise up its 2021 growth projection of 5.0% due to less-than-expected contraction in the first quarter.”

Kevin Brown, savings specialist at Scottish Friendly, added: “The UK economy was thrown back into reverse in January as GDP dropped by 2.9%. The reintroduction of lockdown restrictions is once again the reason for another significant drop, albeit a less severe decline than we saw in April of last year.

“It’s uncertain how this will affect GDP over the remainder of Q1 but the roadmap out of lockdown provides hope of a healthy bounce back from April onwards.

“We expect a household spending boom throughout spring and summer which could help push the UK’s economic output back above pre-pandemic levels. This will provide a much-needed shot in the arm for many businesses but it could potentially hurt some households in the long-run.”

He concluded: “If inflation rises sharply above the Bank of England’s 2% target then families who have savings held in bank of building society accounts will see the value of their cash quickly eroded.

“We need to keep a watchful eye on the rate of consumer spending from April onwards to ensure that households don’t pay the price for driving the UK economy forward.”